Financial Assets and Liabilities as per IND AS 109

We are in the season of Statutory audit and few people are working in companies where IND AS is applicable, and few are in companies where IND AS is not applicable. When you compare both the financials, one of the major differences which you find on the face of balance sheet is Financial assets and Financial liabilities in IND AS financials. Let us have a look on what those are and their recognition criteria.

Financial Asset (FA):

A Financial Asset is any asset i.e.

• Cash includes deposits of cash with banks or financial institution.
• any equity instrument of another entity (such as investment in equity shares of another entity i.e. BHEL, RIL)
• a contractual right to receive cash or another financial asset from another entity (such as trade receivables, loan receivables, bonds receivables)
• a contractual right to exchange the financial assets or financial liability with another entity under the conditions that are favourable to the entity.
• A contract that will or may be settled in entity's own equity instruments and is a non-derivative for which the entity is or may be obliged to receive a variable number of entity's own equity instruments; (where shares are used as currency)
• Derivative Contracts which is Favourable to the entity

Examples of FA:

1. Trade Receivables, Loan given, Cash and bank balances, etc
2. Assets such as Rent advance (not FA because even though it is a kind of advance, the advance is given for getting the service hence we will not receive any cash or another financial asset), Advance Tax (not FA, even though we get refund from department in case of excess payment as taxes are out of the scope of IND AS 109), etc are not the FA as per IND AS 109.

Financial Liability (FL):

Definition of Financial liability is exact opposite to Financial Asset. Financial liability is any liability i.e.

• A contractual obligation to deliver cash (such as trade payables, loan liabilities) or to deliver another financial asset to another entity.
• A contractual obligation to exchange the financial asset or financial liability with another entity under the conditions which are potentially unfavourable to the entity.  
• A contract that will or may be settled in entity's own equity instruments and is a non-derivative for which the entity is or may be obliged to deliver a variable number of entity's own equity instruments; (a liability which is to be settled in variable no. of own equity shares, which are used as currency).
• Derivative Instruments which are unfavourable to the entity.

Examples of FL:

1. Trade Payables, Employee dues, Security deposits accepted (refundable), etc
2. Convertible debentures cannot be considered as FL if the liability is to be settled in Fixed no. of own equity shares. In case of Irredeemable preference shares, share value should n't be considered as FL as the amount is not repaid unless the company liquidates, and the Dividend portion should be considered as FL as the same is paid to the holders.

Financial Assets are categorised into 3 categories for the accounting purpose which is based on the entity's business model for managing the financial assets.

(A) Financial assets measured at Amortised cost (AMC): 

• If the business model is such that the objective is to hold such asset till maturity date and earn contractual cash flows entirely.
• Such asset can generate INTEREST INCOME only on the instruments. (i.e. not able to sale and earn other income like capital gain)
• And the instrument generates cash flows only from INTEREST & PRINCIPAL on SPECIFIED DATES.

Then such FA can be classified under AMC.

e.g. FD, LIC, Debentures redeemable in cash, staff advances, Govt. Securities and Bonds.

(B) Financial assets measured at Fair Value Through OCI (FVTOCI):

• If the business model of an entity is such that the objective is not to hold till maturity date but to sell such instruments in the market or having no maturity
• Such Asset can generate INTEREST as well as OTHER INCOME (such as capital gain) from the sale of instrument
• And the instrument generates PRINCIPAL & INTEREST on SPECIFIED DATES.

Then such FA can be classified under FVTOCI.

e.g. Listed company's debentures, irredeemable instruments, etc.

(C) Financial assets measured at Fair Value through P&L (FVTPL):

This is a residual category and the financial assets falls under this category are generally those assets whose contractual cash flows are not fixed and they do not generate cash flows on specified dates such as Investments in equity shares of other companies.

Initial Recognition of FA & FL:

Financial Assets - Initial Recognition at Fair Value

(a) Amortised Cost - at Fair Value +/- Transaction Cost (here fair value is nothing but the present value of cash inflows at expected rate of return (ERI)).

(b) Fair Value through OCI (FVTOCI) - at Fair Value +/- Transaction Cost (here fair value is nothing but the market price of the instrument).

(c) Fair Value through P&L (FVTPL) - at Fair value (transaction cost is to be charged to P&L a/c directly)

Financial Liabilities - Initial Recognition at Fair Value

(a) Amortised Cost - at Fair Value +/- Transaction Cost

(b) Fair Value through P&L (FVTPL) - at Fair value (transaction cost is to be charged to P&L a/c directly)

Subsequent Recognition of FA:

(a) Amortised Cost - Asset is to be measured at the PV of contractual cash flows (CCF) at ERI. Income shall be recorded in the P&L account.

(b) FVTOCI - At Balance sheet date such Financial Asset is required to be measured at Fair Value (market value) and any changes in carrying amount due to fair valuation will be accumulated in OCI. (since it is unrealized gain or loss). On derecognition of FA under this category, accumulated balance in OCI in respect of such FA shall be transfer to P&L a/c. (it means it becomes realised gain/loss). Regular (specified) Income shall be recorded in the profit and loss statement always.

(c) FVTPL - At Balance sheet date such Financial Asset is required to be measured at Fair Value (market value) and any changes in carrying amount due to fair valuation will be recognised in P&L A/c. Regular Income shall be recorded in the profit and loss statement always.

Subsequent recognition of FL:

(a) Amortised Cost - Liability is to be measured at the PV of contractual cash flows (CCF) at ERI. In case of modification in financial instrument, PV is to be calculated based on the revised ERI, revised service period and revised payment terms and the difference should be transferred to P&L.

(b) FVTPL – Liability is to be recorded at fair value and any difference should be transferred to P&L account.